The recent Australian case of Cam & Bear Pty Ltd v McGoldrick, which deemed a self-managed superannuation fund (SMSF) Auditor responsible for losses incurred by a SMSF has sent a clear message to Auditors: that they need to be held to a high standard.
Here are the key facts about the case and how it may impact you.
The details
This case involved the trustee of the SMSF, Cam & Bear Pty Ltd Superannuation Fund, and its Auditor, John McGoldrick, who audited the fund over four years (2003-2007). Dr Lance Bear and his wife Ms Jennifer Campbell were the Directors of the SMSF trustee and on advice from their Accountant (and friend), Mr Lewis, believed the fund consisted of cash and shares. Unfortunately, though the money was lent by the Accountant on an unsecured basis to multiple companies that he owned.
McGoldrick questioned the description of the assets with the Accountant who assured him the SMSF trustee was satisfied and did not undertake any further investigation. He never communicated with the trustee and signed and certified the audit report annually.
When Bear attempted to withdraw cash from the SMSF, he was unable to, given the money had been used for unsecured loans that were worthless when the companies went into voluntary administration.
At this point, Campbell and Bear sued McGoldrick for damages for negligence as well as misleading and deceptive conduct.
The outcome
In the initial hearing, the NSW Supreme Court found that while McGoldrick had breached his duty of care and made misleading statements in regard to the accounts, that his actions did not ultimately cause the loss.
This was unanimously overturned by the NSW Court of Appeal when it handed down its decision on 23 May 2018. The primary issues it considered were:
- The actual scope of the Auditor’s duty; and
- Whether the Auditor’s breach of duty caused the loss.
It found the trial judge had taken a narrow approach, and as such determined McGoldrick to be largely responsible for the loss.
The Court of Appeal apportioned 90% of the losses to McGoldrick and argued that he had failed to inform Bear and Campbell of the true nature of the loans, which, had they known were unrecoverable may not have invested. Mr Lewis avoided any sanction despite the fact he recommended the investment and prepared the financial statements that were presented to McGoldrick.
The impact on Auditors
In this case, McGoldrick charged $350 for each audit and was held responsible for 90% of the fund’s loss despite Mr Lewis’ actions and the failure of Bear and Campbell to exercise a high degree of care and diligence.
It’s been just over a year since the judgment and some argue that the impact of the case has been little but rising SMSF compliance costs. Perhaps time will tell, but either way it does
send a strong message to Auditor’s to exercise a high standard of care in the context of SMSFs, especially when the trustees lack financial expertise. They must ensure that a fund’s accounts are accurately described in financial reports and that the accounts, where required, are qualified.
Please note: This information is of a general nature only. Readers are advised to seek legal advice on any particular matters.
Sources: AFR, Hall and Wilcox, GC Legal, Maddocks
